Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.

Scott Turow’s Flawed Analysis of the Martha Stewart Case

They have repeatedly noted that Ms. Stewart was charged only with lying after the fact about the stock sale, but not with securities fraud for the transaction itself. The Wall Street Journal editorial page, for example, said there “was something strange about prosecuting someone for obstructing justice over a crime that the government doesn’t claim happened.” And some feminists have suggested that Ms. Stewart was being penalized for being a powerful woman.

I don’t buy any of it. What the jury felt Martha Stewart did — lying about having received inside information before she traded — is wrong, really wrong. And the fact that so many on Wall Street have unashamedly risen to her defense is galling — galling because what she did actually harms the market. Wall Street leaders should be expressing chagrin that a corporate tycoon, who was also a member of the New York Stock Exchange board, could feel free to fleece an unwitting buyer.

H’mm, let’s think clearly about Mr. Turow’s analysis.

I agree that it was wrong for Martha to lie, although it should be pointed out that Martha’s lie was her contention to government investigators that she was innocent of the crime of insider trading, for which the government did not charge her.

But then, after noting Martha’s lie, Turow criticizes Martha because she engaged in illegal insider trading, the charge for which she was not prosecuted. Martha’s defenders — notably Professors Bainbridge and Ribstein — have defended Martha because the government elected not to charge her with the real crime (i.e., insider trading) and instead prosecuted her for merely claiming her innocence of that charge.

Consequently, Turow jumps from the premise that Martha’s lie was wrong to the proposition that she was guilty of insider trading. Maybe so, but the government did not prove that. Turow then asserts the following:

It’s true that Martha Stewart was not accused of securities fraud for selling her ImClone stock, because, the prosecutors said, historically no one else had been charged criminally with insider trading in similar circumstances.

Well, then that should apply also to prosecuting someone for proclaiming their innocence of a charge, which “historically no one else had been charged . . . in similar circumstances.”

Finally, Turow plays the class warfare card, reasoning that Martha’s defenders suggest different treatment for her because she is rich and famous:

Perhaps the most troubling aspect of the whole case, to me anyway, is how the arguments in defense of Ms. Stewart show a widespread mentality that is all too comfortable with unwarranted privilege. It is yet another example of how justice is very different for the rich and poor.

Consider: While it’s not insider trading for Martha Stewart to make some $50,000 using stolen information because she did not have the duty not to steal it, something very different would happen to you if you were caught with, say, a stolen watch in your hand. In that circumstance, the law virtually presumes you are guilty. For decades, American juries have been instructed that when a person is found in unexplained possession of recently stolen property, it is proper to infer that the person knows it is stolen, and thus almost certainly is guilty of receiving stolen property.

Likewise, while it’s technically not insider trading for someone to sell shares of stock for more than what he knows, through inside information, to be their true market value, the converse, your buying or selling that hot watch at a steep discount, will almost inevitably get you convicted for trading in stolen property. When we’re talking about these petty kinds of crimes, most often committed by the poor, the law does not bother with airy discussions of fiduciary duty. I can’t take seriously those who want to believe that the starkly differing contours of the law in these roughly parallel circumstances are unrelated to the economic circumstances, and social standing, of the typical violators.

Turow’s reasoning here is utterly muddled.

“Roughly parallel circumstances” between selling stock on inside information and stealing a watch and then hawking it? These circumstances are completely different — Martha bought her stock and then sold it; the thief stole the watch and sold it. Martha’s profit is the difference between the sale price of the stock and her purchase price, net of taxes. The thief’s profit is the gross sales price.

For these circumstances to be “roughly parallel,” either Martha would have had to steal proceeds from the sale of stolen stock (for which I’m sure she would have been prosecuted) or the thief would have had to buy the watch and then sell it to an unsuspecting buyer for a higher price even though the thief knew information about the watch that made it less valuable.

Despite Turow’s self-righteousness, there are not many prosecutions over the allegedly fraudulent sale of a watch.

Even on the one correct point that he makes, Turow has it turned around. Yes, justice is very different for the rich and poor. In this particular case, someone without Martha’s fame would have had her wrist slapped, been required to disgorge her profits (as Martha did), and that would have been the end of it.

However, that was not the end of it in this case because Martha is a high profile target and she did not handle the scrutiny of the transaction well.

Indeed, reasoned defenders of Martha do not defend her because they believe in a different standard for the rich than the poor. Rather, they defend her because the same standard should apply to both.

Those, like me, who have managed to avoid reading Scott Turow’s ubiquitous novels may now choose to avoid Scott Turow’s corporate law scholarship. Instead, they can read Houston’s Clear Thinkers’ on-target dismantling of Turow’s analysis of the Martha …